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SAIL: High costs, forex loss weigh on profits

Feb 14, 2012

SAIL has announced its results for the quarter ended December 2011. The company has reported a decline of 4.9% YoY and 42.9% YoY in net sales and net profits for the quarter ended December 2011. Here is our analysis of the results.

Performance summary

The topline of the company declined by 4.9% YoY due to muted steel demand.

Operating profits decline by 10.3% YoY mainly due to high input cost, especially high price of imported coal.

At the bottomline level, profits for the quarter declined by 42.9% YoY, mainly on account of foreign exchange fluctuation loss.

Other income during the quarter grew by 41.5% YoY.

For the nine months ended December 2011, net sales increased by 4.8% YoY while net profits declined by 41.7% YoY.

Financial performance snapshot

(Rs m)

3QFY11

3QFY12

Change

9mFY11

9mFY12

Change

Sales

112,797

107,288

-4.9%

311604

326498

4.8%

Expenditure

95,172

91,477

-3.9%

259190

284193

9.6%

Operating profit (EBDITA)

17,625

15,811

-10.3%

52414

42305

-19.3%

Operating profit margin (%)

16%

15%

16.8%

13.0%

Other income

2,711

3,837

41.5%

10,327

13,402

29.8%

Depreciation

3,793

4,093

7.9%

10,987

11,779

7.2%

Interest

592

1,855

213.1%

2,979

5,567

86.9%

Profit before tax

15,950

13,700

-14.1%

48,775

38,361

-21.4%

Exceptional item

332

-4,663

NA

919

(9,867)

NA

Tax

5,207

2,716

-47.8%

15,953

8,838

-44.6%

Profit after tax/(loss)

11,074

6,321

-42.9%

33,741

19,657

-41.7%

Net profit margin (%)

9.8%

5.9%

10.8%

6.0%

No. of shares (m)

4130.4

Diluted earnings per share (Rs)

8

P/E ratio (x)

13.1

*trailing twelve month earnings

What has driven performance in 3QFY12?

SAIL has reported a decline of 4.9% YoY in net sales. This is because of slowdown in demand from domestic as well as international markets. Rising interest rate and global uncertain economic situation has led to lower demand for steel.

Break-up of operating costs

(Rs m)

3QFY11

3QFY12

Change

9mFY11

9mFY12

Change

Raw Materials

51009

44207

-13.3%

129474

139951

8.1%

% of sales

45.2%

41.2%

41.6%

42.9%

Staff costs

18635

18645

0.1%

17618

61115

246.9%

% of sales

16.5%

17.4%

5.7%

18.7%

Consumption of stores and spares

5808

6572

13.1%

55756

19292

-65.4%

% of sales

5.1%

6.1%

17.9%

5.9%

Power & fuel

8876

11285

27.1%

26426

33141

25.4%

% of sales

7.9%

10.5%

8.5%

10.2%

Other Expenditure

10843

10769

-0.7%

29917

30693

2.6%

% of sales

9.6%

10.0%

9.6%

9.4%

As far as operating profits are concerned, they have taken a hit to the tune of 10.3%.YoY during the quarter. The reason for the decline was the increase in the raw material costs. Prices of coking coal, a key raw material used in making steel, jumped to an average of USD $280 per tonne during the third quarter as compared to average USD $205 per tonne during the same period last year. A weaker rupee makes imports more expensive. SAIL imports 70% of its coking coal requirements from international markets where prices have remained firm. Operating margins also declined by 1% YoY.

At the bottomline level, profits declined by 42.9% YoY during the quarter. The net profit margins declined from 10.8% in 3QFY11 to 6% in 3QFY12. The decline in net profit was because of steep Rupee depreciation against both Dollar and Euro which resulted in foreign exchange fluctuation loss of Rs 4.7 bn as compared to a profit of Rs 332 m on short term foreign currency loans in the same quarter last year.

The company has declared an interim dividend of Rs 1.2 per share for the financial year 2010-11.

During the quarter SAIL-led AFISCO (Afghan Iron & Steel Consortium), which had submitted its bid for mining exploration rights at Hajigak having an estimated reserve of 1.7 bn tonnes of iron ore, won the status of ‘Preferred bidder' for blocks B, C and D of the mines.

What to expect?

Steel prices are starting to show signs of improvement. The demand for steel from construction sector has been on the upswing and the management expects prices to improve or at least remain steady. The company's ambitious modernization plan has been delayed. By the end of the next fiscal year, its capacity is likely to reach 19 m tonne as a result of the modernisation of its five integrated steel plants. The company's follow on public offer (FPO) has been put off until the next fiscal. The company has outlined a capex plan of Rs 145 bn for FY13 for which it plans to borrow Rs 70 bn.

At the current price of Rs 110, the stock trades at around 1x our estimated FY14 book value per share. We maintain a positive view on the stock.

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